UPDATE 2-Spain's Ferrovial bids for three British airports - source

Mon Feb 17, 2014 2:08pm EST

* Ferrovial bids for Aberdeen, Glasgow, Southampton airports

* Offer worth 800 million pounds - Expansion

* Firm discusses joint bid with Macquarie and IFM - report

By Andrés González and Freya Berry

MADRID/LONDON, Feb 17 (Reuters) - Spain's Ferrovial has offered to buy three British airports from its partners in Heathrow Airport Holdings (HAH), a source with knowledge of the matter said on Monday, in a deal that would give regulators less control over its profits.

The source did not give details on how much the Spanish infrastructure group was prepared to pay for Aberdeen, Glasgow and Southampton airports. Spain's Expansion newspaper reported the offer was worth 800 million pounds ($1.3 billion).

HAH and Ferrovial declined to comment.

Ferrovial, which is the largest stakeholder in HAH with a 25 percent share, has been on the hunt to strengthen its airport business as it seeks to diversify further from its crisis-hit domestic construction business.

The firm has discussed a joint bid for the three airports with at least two Australian funds, Macquarie and Industry Funds Management (IFM), Expansion said, citing industry sources.

Macquarie and IFM declined to comment.

Unlike Heathrow, none of the three airports are regulated by the Civil Aviation Authority (CAA).

Heathrow, Britain's biggest airport, complained last month about "draconian" plans for a price cap on airlines, which it said would limit its rate of return on capital investment to an "unsustainable" 5.35 percent.

By contrast, the lack of CAA constraints on the far smaller airports of Aberdeen, Glasgow and Southampton would allow Ferrovial to focus on profits.

"Ferrovial will see its exposure to regulatory risk reduced," said Pablo Ortiz, equity analyst at Spanish brokerage Interdin Bolsa.

"This is very important because you can deploy freely the strategy that you want. To (be able to) increase return on equity as much as you can: it's a huge difference."

HAH would also benefit from a deal as it would be able to focus solely on Heathrow, Ortiz said.

"Management at Heathrow requires all the devotion you can address," he said. "I think management want to focus on that front, and also the issue of the third runway is very important. It's a second front that management need to handle."

The prospect of a third runway at Heathrow has been highly contentious. Supporters say the airport is overstretched and call for the UK to be better connected to other economic hubs, but critics say the runway would bring noise and air pollution.

STRATEGY SWITCH

The offer for the three airports marks a turnaround in Ferrovial's strategy after years of selling off its airport stakes to cut debt.

It took control of HAH, then called BAA, in 2006 in a 10.3 billion pound, highly leveraged deal but has since gradually reduced its holding.

Last year it sold an 8.65 percent stake in Heathrow to British pension fund Universities Superannuation Scheme.

Now diversification has replaced debt reduction, as the company tries to strengthen its airport business in an attempt to branch out from Spain's floundering domestic construction sector.

In December, Sky News reported that Ferrovial had said it wanted to buy the three airports.

The deal comes as high-quality infrastructure investments, sought after by pension funds for their long-term, low-risk nature, have grown increasingly scarce. Investor demand has risen as forced corporate sell-offs decline thanks to buoyant debt markets, and governments shy away from privatising state assets.

"This does show significant remaining appetite for airport stakes," said Simon Morris, vice president at aviation advisory firm ICF International, adding that good-quality airport stakes were now in short supply.

Analysts said a $1.3 billion price for the deal implied a multiple of 13 times the three airports' estimated 2013 earnings before interest, taxes, depreciation and amortisation (EBITDA).

"This in our view would represent a full price, arguably with limited upside in terms of synergies or efficiency as Ferrovial has already been managing these assets via HAH," said Juan Carlos Calvo, analyst at Espirito Santo investment bank.

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